In Swanson v. Weil, Civil Action No. 11-CV-02142-WYD-KLM, 2012 WL 4442795 (D. Colo. Sept. 26, 2012), the United States District Court for the District of Colorado granted the defendants’ motions to dismiss. Plaintiff Charles D. Swanson, a shareholder of Janus Capital Group, Inc. (“Janus”), brought a derivative action against the company, as well as several of its directors and executive officers. The plaintiff alleged the board approved an excessive compensation package and that the company included false and misleading statements in its proxy statement. Both Janus and the individual defendants moved for dismissal on the grounds that the plaintiff did not make the required pre-litigation demand to the board and that the demand would not have been futile.
A complainant must make a demand upon the board prior to initiating litigation. However, courts excuse the demand requirement if a reasonable doubt is created that “(1) the directors are disinterested and independent and (2) the challenged transaction was otherwise the product of a valid exercise of business judgment.”
Under the first prong, the court reasoned that all directors except for one were classified as independent directors, resulting in a disinterested board. However, the plaintiff argued that despite being comprised of independent directors, the board was interested because a substantial likelihood of liability existed. The court analyzed this argument in conjunction with the second prong.
To satisfy the second prong, the facts must raise either “(1) a reason to doubt that the action was taken honestly and in good faith or (2) a reason to doubt that the board was adequately informed in making the decision.” The court dismissed the latter because the complaint did not challenge that the board made an informed decision. The plaintiff offered several arguments to support the former, including that the compensation package violated Janus’ pay for performance plan, the board made false statements in the proxy statement regarding compensation determinations, and the defendants should not be rewarded for poor performance. However, the court failed to find sufficient facts in the complaint to show a substantial likelihood that liability existed.
The plaintiff also sought to allege liability by claiming that the pay package increased compensation by 41% during a time of decreasing stock prices. The court reasoned that allegations of increased compensation during years of poor performance alone could not sustain a claim. The plaintiff also asserted that the shareholder vote against the compensation package, previously discussed here, was enough to create liability and show bad faith. The court determined this was not enough to show bad faith because the vote was not binding on the board, and it took place after the board approved the package.
Finally, the plaintiff pointed to an earlier demand by a different shareholder that the board ignored. The court rejected this argument because a prior demand does not excuse a future demand by a different shareholder.
The primary materials for this case may be found on the DU Corporate Governance website.